Can Smithfield meet Chinese demand without driving up U.S. prices?

September 29, 2013|By Ryan Murphy, rmurphy@dailypress.com

It's official: Smithfield Foods now belongs to Chinese pork giant Shuanghui International Holdings. The sale was approved by an overwhelming majority of shareholders on Tuesday, and with it came access to the burgeoning Chinese pork markets that Smithfield executives had been heralding as huge new source of potential profit.

That raises two questions: Now that Smithfield has access, does it have the capacity to meet the demand? And will satisfying the Chinese demand increase the price of a ham in an American supermarket?

Smithfield Foods chief executive Larry Pope told the Daily Press in June that the merger could temporarily increase the price of pork products in the U.S., but said farmers and processors would ramp up production and prices would settle over time.

U.S. farmers would benefit from the increased demand for their products, he said.

Smithfield owns 400 hog farms and contracts with 2,000 more. It employs more than 46,000 people internationally, 3,700 in Virginia.

In a report to stockholders last year, Smithfield said its hog farms produce 15.8 million hogs annually.

The pork segment of the company processed 27.7 million hogs in fiscal year 2012, the report said, and exports made up 18 percent of the company's pork sales for that year.

The report said the total capacity of Smithfield's processing plants is about 110,000 hogs per day, or about 40 million each year. It would seem the infrastructure is in place to boost production.

According to the U.S. Bureau of Labor and Statistics' Consumer Price Index, pork products in America have held fairly steady over the last year. Pork prices overall increased 1.7 percent between August 2012 and August 2013, led by an 8.2 percent increase in bacon and related products.

A study released in April by the University of Missouri indicated that a 1 percent increase in pork exports would mean more than a 3 percent increase in hog prices. The study said that both exports of U.S. pork and the value of pork have grown dramatically over the last 27 years.

Experts seem to agree that Shuanghui will boost Smithfield production to bring the bacon home to China, but weren't sure what the effect on domestic prices would be.

Daniel Slane, a business owner appointed to the U.S.-China Economic and Security Review Commission, was critical of the deal when he testified at a Congressional hearing about the sale. Slane said that in the short term, Shuanghui would be slow to change anything about the sale or production of Smithfield's products. However, he said, growth in the Chinese market over the next two or three years will likely lead to massive exporting, which would drive prices up here in America.

"Imagine the pressure of close to a billion people demanding Western diets," he said. "Down the road, there's going to be a huge demand for pork (in China)." China is already the number three importer of American pork, after Japan and Mexico.

Slane said he wouldn't be surprised if Shuanghui ramped up hog production in the U.S. and shipped slaughtered hogs to China to be butchered, shifting thousands of jobs from the U.S. to China.

Dallas-based lawyer Clayton Bailey has spent the last 12 years representing companies in the meatpacking industry. He represented Pilgrim's Pride, now Pilgrim's Corp., when it was acquired by a massive Brazilian multinational meat-processing company.

He believes Shuanghui will work with existing producers or build new farms to gear up production here in America and increase exports without having to divert product from the American market.

"I don't see Smithfield doing anything to lose (American) market share," he said. He speculates that the American market will continue to be too valuable for Shuanghui to consider diverting Smithfield's products to China, opening the door to competitors who are ready to swoop in.

Charlie Skuba, a business professor at Georgetown University, agrees that production will likely increase despite a slowdown in pork exports to China this year.

"The good news is that there's going to be long-term appetite for pork products in China," Skuba said. He said Chinese consumers would probably be willing to pay a premium for the quality and safety assurances associated with American brands after previous safety problems in China. He said this growing Chinese appetite probably won't raise the price of pork in America.

Skuba said the deal won't simply mean shipping hogs one way. More important for Shuanghui than hog production may well be learning how to deal with picky consumers, which will help them compete in an increasingly demanding Chinese market and teach them how expand to other countries.

"You find a lot of Chinese companies among the largest companies in the world, but what you don't find is big Chinese brands outside of China," he said. "Shuanghui will use the U.S. market as a marketing laboratory, because the future isn't just in the Chinese market but around the world."